The Need for Increased Scrutiny of PRC Acquisitions of U.S. Tech Firms

An often overlooked consequence of the United States’ 13 years of war in the Middle East is the insights adversaries have acquired into the technological advantages the U.S. military holds over the rest of the world. The People’s Republic of China (PRC) has taken advantage of this opportunity to study U.S. military strategy and close the technology gap. The PRC has developed counter measures such as anti-satellite missiles to disrupt communications and GPS, thereby limiting battlefield awareness. It has built sophisticated cyber capabilities to steal technology and critical information that the PRC sees as essential for gaining information dominance for informationized warfare. Most recently the PRC claims to have launched the world’s first Quantum Radar System, which can reportedly detect stealth aircraft and is highly resistant to jamming.

According to the U.S.-China Security and Economic Commission (USCC), the PRC has increased investment in research and development by 10 percent over the last decade and has instituted several technology development plans focused on offensive capabilities. The report goes on to say that PRC Generals in the People’s Liberation Army (PLA) have alluded to these capabilities being aimed specifically at the United States. The Medium and Long Term Defense Science and Technology Development Plan was instituted in the early 2000s with the goal of surmounting the technology gap between the PRC and the world’s tech leaders by 2020. The Plan expands the number of defense laboratories engaged in basic research and establishes closer connections with civilian universities. The plan also aims to create a more favorable environment for technology companies to promote innovation and increase the scale and channels of investment in defense science and technology. Most importantly, it improves the ability to leverage foreign sources of technology and knowledge transfer by finding opportunities for international research and development cooperation. This includes encouraging defense enterprises and research institutes to set up joint research centers and laboratories.1 The second critical plan is the New High Technology Plan, also known as the 995 Plan. This plan was instituted after the accidental U.S. bombing of the PRC embassy in Belgrade, a potential cause of the intensified development of strategic weapons systems. One of the guiding principles of the plan put forth by then Chairman of the Central Military Commission Jiang Zemin was the need to acquire foreign technology transfers by “whatever means necessary.”2 The results of these plans have been the growth of precision strike systems, command and control systems and weapons allowing the PLA to strike accurately from a distance.3 In addition to these two plans, the aspirations set out in the 12th Five Year-Plan set goals for the PLA to match first-tier global military powers. Finally, the PLA’s 2015 Defense White Paper explicitly stated the intent to increase development in advanced weaponry equipment, and in depth civil-military integration, (军民融合), specifically in key areas like technology.

In response to the PLA’s increased technological capabilities, in 2014 then Secretary of Defense Chuck Hagel announced the Third Offset Strategy. This new strategy is meant to address concerns that “our military’s technological advantage is being challenged in ways we’ve never experienced before.” The strategy focuses on developing new technologies to allow the U.S. military to maintain its technological advantage going into the future. It also looks at developing new, innovative ways to leverage current capabilities. Under Secretary Carter, the Department of Defense (DOD) is attempting to further this initiative by building closer relationships with private technology firms in Silicon Valley. To help with engaging tech innovators, the DOD established the Defense Innovation Unit Experimental facility (DIUx) with offices in Silicon Valley, Boston, and most recently Austin. DIUx is meant to streamline the process so it is easier to do business with commercially-focused companies and seeks to introduce commercial technologists to national security challenges for potential military applications. Some of the innovative technologies DIUx and DOD are concentrating on include automation and artificial intelligence (AI). The 2017 defense budget will include $12 billion to $15 billion for experimentation and demonstration of new technologies, including AI and deep learning machines.

The U.S. military is not the only one with an increasing interest in these new technologies. The same year Secretary of Defense Chuck Hagel announced the Third Offset Strategy, the PRC also began significantly increasing its investment in innovative technologies like AI. Just in the first half of 2016, PRC investors including Baidu and state owned enterprises invested $6 billion in AI startup firms. The increase in investment is part of a government push to develop the technology industry. According to PRC state media, the National Development and Reform Commission, Ministry of Science and Technology, the Ministry of Industry and Information Technology, and the Cyberspace Administration of China have formulated a three year plan to speed up the development of the AI sector. This will include projects on unmanned vehicles and robots. Undoubtedly, the PLA is seeking to incorporate such technology into its systems. In August Wang Changqing, director of the General Design Department of the Third Academy of the China Aerospace Science and Industry Corp (CASIC)4, announced that future cruise missiles will have a high level of AI and automation.

Accompanying the increased investment has been an increase in mergers and acquisitions by PRC buyers in the United States. According to the Rhodium Group, in 2006 there were seven completed mergers and acquisitions. In 2014 there were 100, an increase of 1,328 percent. The Rhodium Group also found since 2013 the majority of deals have switched from the energy sector to technology. However, the numbers of investigations performed by the Committee on Foreign Investment in the U.S. (CFIUS) were found to be “disproportionately low” compared to the increased number of mergers and acquisitions that have taken place. In its latest report CFIUS states, “There is an effort by foreign governments or companies to acquire U.S. companies involved with research, development, or production of critical technologies for which the U.S. is a leading producer.” This is worrisome as there are national security implications involved with the acquisition of U.S. technology firms.

There are recent examples of attempted acquisitions by the PRC being ruled a threat to national security. In 2012 Ralls Corporation attempted to buy wind farms near U.S. Navy airspace where drones are tested. Last year a U.S. chip maker, Micron, turned down a $23 billion acquisition offer from the state-owned Tsinghua Unigroup because the deal would have likely been blocked by CFIUS. Several months later Tsinghua Unigroup side stepped CFIUS and announced it had made a “purely financial” investment of $41.6 million in Lattice Semiconductor, giving it a six percent stake in the company. Because it is only a financial investment it was not subject to CFIUS investigation. This is the same Lattice Semiconductor that was targeted by two Chinese residents attempting to send sensitive technologies back to the PRC without an export license. The two were indicted in 2012 for export and money laundering violations for attempting to acquire Programmable Logic Devices (PLD), which are designed to operate in extreme climates and can be used in missiles and radar systems. Eight years before this incident, Lattice Semiconductor was accused of illegally exporting PLDs six times to the PRC between April 2000 and July 2001, and agreed to pay a $560,000 civil penalty to settle the charges.

One possible explanation for the increase in technology company acquisitions is the increased focus on artificial intelligence. Artificial Intelligence is much more difficult to steal through cyber theft. According to the DOD, “China continues to leverage foreign investments, commercial joint ventures, academic exchanges, the experience of Chinese students and researchers, and state-sponsored industrial and technical espionage to increase the level of technologies and expertise available to support military research, development, and acquisition.” The PRC’s increased efforts are paying off. Whereas the U.S. used to be the leader in deep learning research, it was recently surpassed by the PRC.

increasingly investing more in technologies like AI to achieve the advantage in the battlefields of the future. The PRC knows the promotion of dual-use technology development in critical sectors like AI is essential to building modern armed forces. Keeping with the 2015 Defense White Paper, President Xi Jinping recently urged greater cooperation between the civilian and military sectors in order to build stronger armed forces. He has also called for the Chinese Communist Party (CCP) to reaffirm its leadership in state-owned firms to ensure that they remain “a reliable force that the party and the nation can trust and an important force in firm implementation of the central leadership’s decisions.” Decisions such as investing in and acquiring U.S. technology firms in order to help the PLA overcome the technology gap it currently faces against the U.S. military. If the United States government wants the Third Offset Strategy to be successful and maintain the Department of Defense’s technological advantage over the PLA, it must increase its scrutiny of Chinese acquisitions of U.S. technology firms by these state-owned enterprises.

Charles Emmett is an Intern at the Project 2049 Institute. He is currently a Master’s candidate at the Josef Korbel School of International Studies at the University of Denver, where he focuses on China and U.S. National Security.

About The Project 2049 Institute

The Project 2049 Institute seeks to guide decision makers toward a more secure Asia by the century’s mid-point. The organization fills a gap in the public policy realm through forward-looking, region-specific research on alternative security and policy solutions, with an eye toward educating the public and informing policy debate.